Blog Article

Meeting hedge fund compliance requirements while using a black box trading model

Jan 17, 2023

Meeting hedge fund compliance requirements while utilizing a black box trading model can be tricky. With ComplySci’s Black Box Firm Trade API it doesn’t have to be.

In recent years, hedge funds have embraced the black box model for trading and investments. For those who aren’t as familiar, black box trading models convert data into unique investment strategies based on a proprietary algorithm.

However, according to Investopedia, “technology advances, particularly in machine learning capabilities, make it impossible for a human mind to analyze or understand precisely how black box models produce their conclusions.”

And while this type of investment strategy, or any other based on a proprietary trading algorithm, offers unique benefits it can also create very specific, and concerning, compliance challenges.

The main one?

Accurately comparing firm and employee trades.

How to use a black box trading model AND meet hedge fund compliance requirements

For many hedge funds which rely on a black box trading model, uploading propriety data to any kind of third-party system is out of the question.  However, when it comes to compliance, the inability to upload proprietary firm trade data can leave the hedge fund open to potential risk should an employee – whether on purpose or by accident – be taking part in prohibited transactions/trades.

What is a hedge fund to do?

As any professional will tell you, meeting hedge fund compliance requirements, especially without the support of an automated software or platform can be extremely time consuming and prone to human error.  And that’s where ComplySci can help.

Introducing ComplySci’s Black Box Firm Trade API.

Working closely with countless hedge funds, we understood the unique challenges which are placed on compliance professionals who work for firms using black box models or proprietary trading algorithms…and the potentially devastating risk it could cause for firms which weren’t able to accurately monitor and compare firm and employee trade activity.

With the introduction of the ComplySci® Black Box Firm Trade API, we’ve solved that issue. In short, the functionality works like this:

Step 1: Compliance team sends firm trade data at the security level to ComplySci via a secure API for analysis between firm trades and employee personal trading activity.

Step 2: Firm trade activity is temporarily stored ONLY in the secure API, outside of the ComplySci application.

Step 3: ComplySci analyzes firm trade data against employee trade activity and brokerage accounts.

Step 4: ComplySci returns the firm trade information which matches employee trade data via secure API.

With this solution, compliance professionals at hedge funds using black box trading models can now take advantage of the numerous and highly beneficial opportunity which automation provides compliance teams across the full scope of the financial industry.

Ready to see if this might be the right solution for your hedge fund? Schedule a demo today!